China Is Still the Place to Be

By George Leong, CFP, MBA — The Leong Side of the Market column

In 2009, it was cool to be in China, where the market action was hot. However, the U.S. has outperformed China so far in 2010, with gains in the NASDAQ and Russell 2000 of over 10% versus a negative position in the Shanghai Composite Index (SCI).
The SCI has been holding above 3,100 and may look to move higher once the nerves and concerns about a Chinese bubble subside.Yes, there is a chance of a bubble in the Chinese real-estate market, and you should be aware of this, but for China, you need to think long-term, as I have always stressed.The reality is that growth in this country is average. In Europe, there are concerns with slow growth. In Germany, for example, GDP growth in 2010 is pegged at a weak 1.5%, but it’s still a nice reversal from a five-percent decline in 2009. Growth in 2011 is even lower at 1.4%. In comparison, the U.S. economy is predicted to grow 2.8% this year and moderate to 2.4% in 2011.The Organization for Economic Cooperation and Development (OECD) reported that the world’s rich economies will slow in the first half of 2010, but it expects growth in the U.S. and Japan to exceed Europe. The growth in Japan is significant, as the country tries to turn the corner after two decades of doing very little. Growth in Japan will also help drive the export market in China.

I feel that Europe may continue to underperform the global markets in 2010 and 2011. Add in the risk in countries such as Greece and Portugal, and we may be in for more problems down the road.

Simply put, the place to be continues to be China. And yes, I’m a Chinese bull! The facts support my opinion and don’t lie. China reported GDP growth at a sizzling 11.9% in the first quarter. That’s impressive — especially given the reasonable inflation of 2.2%, which is well within the upper target of three percent that was set by the government.

China could soon take over as the world’s second-largest economy, vaulting ahead of Japan, if the trend continues. China’s economy was $4.9 trillion in the first quarter versus $5.1 trillion for Japan.

The strong growth in China may allow the government to let its yuan appreciate against other major currencies and help satisfy President Obama to a small degree. This would help prevent the Chinese economy from overheating and causing a bubble-like correction. I suspect that interest rates in China will likely need to rise in order to regulate the money flowing into the economy. The Chinese government could also cut back on stimulus spending and pumping the economy.

The government’s attempt to rein in bank loans — especially in real estate — is positive. I continue to be long-term bullish on China. Think about it: 1.3 billion people and 300 million in the middle class. The country is tops in such areas as cell-phone use, Internet use and auto sales.

You have hundreds of millions of migrant workers still heading to the cities. Per-capita income, while pale in comparison to Western standards, continues to edge higher, and I expect this to continue. You know about my love for Chinese stocks. The key is to ride the rally and take some profits along the way.